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The relative importance of symmetric and asymmetric shocks and the determination of the exchange rate

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  • G. PEERSMAN

Abstract

This paper shows how sign restrictions can be used to identify symmetric and asymmetric shocks in a simple two-country structural VAR. Specifically, the e??ects of symmetric and asymmetric supply, demand and monetary policy shocks as well as pure exchange rate shocks are estimated. The results can be used to deal with two issues. First, it is possible to estimate the relative importance of symmetric, asymmetric and pure exchange rate shocks across two countries or areas, which provides information about the degree of business cycle synchronization. Second, it is also possible to evaluate the relative importance of these shocks in determining exchange rate fluctuations, which can deliver answers to questions like ’Is the exchange rate a shock absorber or source of shocks?’. Evidence is provided for the UK versus the Euro area and compared with the US as a benchmark.

Suggested Citation

  • G. Peersman, 2005. "The relative importance of symmetric and asymmetric shocks and the determination of the exchange rate," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/286, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:05/286
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    References listed on IDEAS

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    1. K. Farrant & G. Peersman, 2005. "Is the exchange rate a shock absorber or a source of shocks? New empirical evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/285, Ghent University, Faculty of Economics and Business Administration.
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    17. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-144, January.
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    19. Farrant, Katie & Peersman, Gert, 2006. "Is the Exchange Rate a Shock Absorber or a Source of Shocks? New Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 939-961, June.
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    Cited by:

    1. Michael Artis, 2008. "What do we now know about currency unions?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 1(1), pages 13-29.

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    More about this item

    Keywords

    exchange rates; symmetric and asymmetric shocks; vector autoregressions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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